Every investigative journalist occasionally dreams of what she might be able to do with monster resources and subpoena power. The answer looks something like Carl Levin, whose latest report on Apple’s (AAPL) tax strategies is Pulitzer-worthy stuff. When Apple CEO Tim Cook testifies in front of Levin today, it’s going to be one of the most uncomfortable grillings of his life. Steve Jobs could be intense — but Carl Levin, in full flow, is truly formidable.
The first discrepancy I’d love to see Levin clear up is a simple factual one: how much income tax does Apple pay? The various tax years and fiscal years are rather confusing, but in its testimony, Apple says that its income tax payments to Treasury were “nearly $6 billion” in FY2012, for “a US federal cash effective tax rate of approximately 30.5%”. (Those numbers imply taxable income of about $19.6 billion.)
The Senate report, by contrast, looks at the 2011 calendar year, and reproduces Apple figures showing $3.884 billion in current federal taxes, plus holding on to $2.998 billion in deferred federal taxes, for a total of $6.882 billion; that means an effective tax rate of 20.1%. (Again, working backwards, the implied total taxable income increases here to $34.2 billion.)
The report then presents the actual amount of cash paid in taxes, as reported on Apple’s tax return. (This is where that subpoena power comes in particularly handy: I’d love to see Apple’s response to a reporter asking to see Apple’s Form 1120 for the past three years.) According to the Form 1120, which is the corporate equivalent of the
1099 1040 for individuals, Apple paid $2.5 billion in actual cash payments to Treasury in FY2011, up from $1.2 billion in FY2010.
The report doesn’t convert those figures into an effective tax rate, just saying that the number would be “well below the statutory tax rate”. But in in the year ended September 23, 2011, Apple overall reported net income of $25.9 billion, while in the following year its net income was $41.7 billion. Much of that income was overseas, of course. But it does seem that Apple’s total actual federal tax payments in both FY2010 and FY2011 were less than 10% of its reported net income.
This is particularly shocking to the US public, which has to pay taxes on its global income. Every other country’s billionaires are extremely good at escaping into a state of tax-free statelessness; America’s aren’t, and we expect that if you’re rich American, you’re going to pay a substantial amount of US taxes.
American multinational corporations, in this sense, lie somewhere in the middle: they don’t need to pay income tax on their global income, and so they can avoid billions of dollars in taxes by moving income to tax-friendly jurisdictions like Ireland, or to subsidiaries such as Apple Operations International and Apple Sales International, which pay taxes in no jurisdiction at all. (Their headquarters are in Ireland, so they are sheltered from US taxes, but since their operations are mostly in the US, they don’t pay Irish taxes, either.)
The only real punishment for avoiding taxes, if you’re a US corporation, is that your offshore profits are stuck offshore, where it can be hard to invest them or return them to shareholders. So when Apple claims in its testimony that it “supports comprehensive reform of the US corporate tax system”, note its two key provisos: that such reform be “revenue neutral”, and that it allow “free movement of capital back to the US”. The first would mean that US corporations wouldn’t actually pay the taxes they’re avoiding right now: total corporate taxes would remain at an all-time low. And the second would mean that the biggest corporate tax loophole of all — the ability to pay no taxes on foreign earnings — would be made substantially bigger.
The Senate report quotes Mark Keightley, making a very important point:
Corporate tax revenues have declined over the last six decades. In the post-World War II era, corporate tax revenue as a percentage of gross domestic product (GDP) peaked in 1952 at 6.1%. Today, the corporate tax generates revenue equal to approximately 1.3% of GDP. The corporate tax has also decreased in importance relative to other revenue sources. At its post-WWII peak in 1952, the corporate tax generated 32.1% of all federal tax revenue. In that same year the individual tax accounted for 42.2% of federal revenue, and the payroll tax accounted for 9.7% of revenue. Today, the corporate tax accounts for 8.9% of federal tax revenue, whereas the individual and payroll taxes generate 41.5% and 40.0%, respectively, of federal revenue.
What we’re seeing here is a corporate class which is vastly more effective at evading taxes than individuals are; I don’t see that trend going away any time soon.
Instead, I have a modest proposal of my own: why not at least require all public US companies to file their federal tax returns with the SEC. They already report the amount of taxes that they pay, but as we’ve seen, the reported numbers, calculated under GAAP, can differ substantially from the actual cash numbers. I’m not saying we’d shame companies overnight into suddenly paying more taxes. But at least we’d be able to see which ones are evading taxes most effectively.